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Using a Bear Collar starring Abercrombie

I elected to do a post-earnings trade in $ANF yesterday in after hours. I ultimately ended up with a 3/4 size short position and then made a plan to do the final portion with options today.

My average on the short is $40.63 and it looked solid as the market opened today. Price drifted further down, briefly dipping under the $39 level. Once I felt it had stalled (at least in this wave) I elected to protect the short position by initiating a Bear Collar using the November options.

Here is the option trade:

Let me break this down:

I am short the November 38 Put

I am long the November 40 Call

This was done for a $.15 debit

How does this work? Well, let’s take a look at 2 scenarios:

1) stock continues to drift down, past the $38 strike by expiration. If this happens, my gains on the short stock position are capped at 38.15

2) stock moves up past the $40 strike by expiration. If this happens, I sell the Call on Friday for whatever value I can – as this will offset the loss of some of the gains on the short stock position

At the moment, the November 38 Put goes for a bid/ask of .09/.11 and the 40 Call has a bid/ask of 1.20/1.27